Business Directories

Hopes for ICE Dubai, DME Oman fade

Dubai, August 21, 2007

Three months after its launch, InterContinentalExchange's sour Middle East contract looks moribund, having failed to trade on two days this month, and rarely trading in Asian time anymore.

The Oman contract on the rival Dubai Mercantile Exchange (DME) is faring slightly better and hopes that the two contracts would transform the Middle East into a price-maker of crude on global markets from a price-taker, are again fading, traders say.

Some 12 million barrels per day (bpd) of Middle East crude head to Asia and its prices have so far been indirectly derived from the Atlantic benchmark Brent crude oil.

Past attempts to launch Middle East sour crude contracts have foundered on poor liquidity as Asian players have consistently shied away from local exchanges and Middle Eastern producers have similarly showed aversion for futures exchanges.

And now ICE Dubai and DME Oman, considered the best attempts to date, look wobbly too.

'ICE Dubai has unofficially died and gone away. I can't see them being able to get some life back into the contract. But DME is not too good either,' a Singapore-based trader with a bank said.

Volumes on ICE Dubai have dwindled this month to an average 49 lots a day, the exchange's data showed. No trades occurred on Aug. 10 and on Aug. 15. More crucially, on most days this month, no Dubai contract had traded by the time Asian trade winds up at 0830 GMT.

DME, backed by the New York Mercantile Exchange, fares better with 164 lots a day, but still on shaky grounds.

Both contracts started well on their first month, with daily trades averaging some 3,000 lots during the first weeks, but volumes have been shrinking since.

The limited interest in both DME and ICE is part of a larger trend in Asian markets, where refiners are reluctant to hedge while producers on the other side do not hedge, making for an illiquid market, even though the region consumes a third of all oil output.

The situation has worsened lately, traders say. 'What is worrying is that liquidity on Dubai has fallen across the board in Asia. Is it temporary? We hope so,' said Marc Lansonneur, managing director, commodity derivatives for French Bank Societe Generale in Asia.

Reasons behind falling liquidity on the over-the-counter markets are unclear. Part of it comes from shrinking volumes over the past year and a half on Japan's Tokyo Commodity Exchange (TOCOM). This has limited the need to hedge the TOCOM Oman/Dubai contract, which is in yen per kilolitre, against Brent contracts' dollars per barrel, traders say.

But August is also an especially slow month so far with little trading on Dubai swaps and Brent/Dubai spreads, and volumes could rebound as traders return from holidays starting September.

'August is not a good time; it's summer vacation mode. And the market is dropping with the subprime issue. People are closing their positions on Nymex and Brent, rather than thinking about Oman and Dubai,' said Tony Nunan, manager at Mitsubishi Corp's risk management unit.

Credit and commodities markets are crimped by fears of a global credit squeeze resulting from the the U.S. subprime mortgage crisis.

The ICE Dubai contract is cash-settled against assessments by reporting agency Platts and traders say this makes it too similar to Platts to be a real novelty.

At the other extreme, some traders worry that physical delivery of Oman crude via DME, a first for a Middle East crude, is threatening to scare off speculators and banks, which do not want physical crude.

A large 4 million barrels of Oman crude for August loading were set for physical delivery in June, a volume exceeded only once in January 1995 by NYMEX's West Texas Intermediate (WTI).

'DME on the first month was probably too good for its own success. The worry is that it is seen as a physical exchange and not as a futures exchange,' the Singapore-based t